In the cosy old days, television networks wined and dined their affiliates – treating them to all sorts of good stuff – and ultimately paying them affiliate fees.
Those days are long gone
In their place are reverse retrans fees, iPad applications, Hulu and a grab for more inventory.
So what’s an affiliate to do?
Over the weekend, I read an interesting blog by Clay Shirky where he paraphrased a TV exec asking the following:
“When, they asked, would online video generate enough money to cover their current costs?”
Here’s the short answer: NEVER
But I get ahead of myself.
The local television model now looks as follows: local affiliates program local news and pay cash for it, they schedule syndicated shows and pay cash or barter for them (barter being ad slots), they run their networks feed and get some ads to sell, and most importantly, they are now starting to get what is known as “retransmission consent” payments from cable and satellite operators. These last payments carry no cost to the affiliates and drop straight into the bank, but as affiliate fees used to.
The problem for affiliates is the following: news costs more and generates less, syndicated programming is now almost all barter and pulling in fewer viewers, and the networks are driving fewer viewers and given up less and less ad time. So the only real area of growth you have as an affiliate is retrans payments. And now the networks want these as well.
In a recent deal – ABC (owned by Disney) – cut a deal whereby some of their payments for retrans would go back to Disney because it is really the network programming that drives the substantial value at a local affiliate. Les Moonves of CBS has said that he assumes that all stations will start the negotiation at 50/50 and go from there. Clearly, the growth engine for affiliates over the last few years is sputtering somewhat – or if it is running nicely – the networks have found a way to tax it.
At the same time as the networks are taxing their affiliates – they have found new ways around them as well.
Network websites all have current programming on hours after it has run on the network. Networks sell shows through iTunes. Networks have iPad applications to bypass even the websites. Networks are investors in Hulu which mimics the networks websites.And when it comes to marquee programming – like sports – networks are going to ask the affiliates to kick in more.
So as a middle man – what business does an affiliate really have
Well they have local news – which is not a great business
And what does the network have? a better business – but one in which they have to support more and more distribution points with content that generates fewer and fewer views due to massive media fragmentation.
So in answer to the question posed on Shirky’s blog: never. With costs going up and viewing going down – all of these media players will just have to accept that the cost of surviving is lower margins. Public companies will not accept this – so they drag their feet – but ultimately – lower margins are almost guaranteed.
And if you are an affiliate – a much lower form of life is all but assured. Right now the stock and bond markets are on fire and all of these guys will avoid bankruptcy (they are all massively levered) by doing debt deals and amend and extending their bank deals – but longer term – the basic affiliate business is just in secular decline. If they can figure out a way to make local relevant (and I would suggest tying up with newspapers) then they might survive long term – but as of now – they offer very little – and get a whole lot – a situation that tends to right itself over time.